NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2011. Financial amounts below are in millions of U.S. dollars unless stated otherwise. The filing is unaudited.
Business context and reporting period
NGL operates retail propane, wholesale supply and marketing, and midstream terminal businesses. Results include the Osterman retail propane acquisition from October 3, 2011 and the SemStream wholesale and midstream acquisition from November 1, 2011. The partnership had no operations before September 30, 2010; acquisitions and differing periods of ownership limit direct year-over-year comparability.
Financial and operating highlights
| Metric | Three months ended Dec. 31, 2011 | Comparable 2010 period | Nine months ended Dec. 31, 2011 |
|---|---|---|---|
| Revenue | $470.6 | $311.1 | $871.5 |
| Gross margin | $30.9 | $19.7 | $44.3 |
| Operating income (loss) | $8.6 | $7.2 | $(1.6) |
| Net income (loss) | $6.1 | $6.1 | $(6.1) |
| Basic and diluted earnings (loss) per common unit | $0.24 | $0.55 | $(0.41) |
Third-quarter gross margin was about 6.6% of revenue, versus 6.3% a year earlier; operating margin was about 1.8%, versus 2.3%. Revenue growth primarily reflected acquisitions and higher wholesale volumes and prices. Management said unseasonably warm weather weighed on volumes, margins and earnings. The wholesale segment’s operating income fell to $3.9 million from $6.4 million, while retail propane rose to $4.9 million from $1.5 million; midstream operating income was $0.8 million, roughly unchanged.
For the nine months, operating cash flow was a use of $13.7 million, compared with a use of $30.6 million in the corresponding reported 2010 period. Cash provided by operations in the December quarter was $39.1 million, following cash use of $52.8 million in the first six months of fiscal 2012. Investing activities used $194.2 million, primarily for acquisitions; financing activities provided $201.9 million. Cash at December 31 was $10.4 million.
At December 31, current assets were $332.1 million and current liabilities $269.1 million, for working capital of $63.1 million. Total debt was $210.1 million: $107.5 million under the acquisition facility and $102.5 million under the working-capital facility. The reported funded-debt-to-EBITDA ratio was 2.52:1, below the 4.25:1 covenant limit; the partnership reported compliance with debt covenants. Substantially all debt was variable-rate. The $330 million credit facility was secured by substantially all assets.
Material changes and transactions
- Osterman was acquired for $96 million cash and 4 million common units. It contributed approximately $29.3 million revenue and $2.4 million operating income in the December quarter.
- SemStream was acquired for approximately $93 million cash and 8.9 million common units. It added terminals, storage, rail cars and about $104 million of NGL inventory. Its acquired midstream operations recorded about $1.0 million revenue and a $0.2 million operating loss in the quarter; the filing does not separately quantify SemStream’s wholesale contribution.
- Total assets increased to $755.2 million from $163.8 million at March 31, 2011, reflecting acquisitions. Goodwill rose to $92.9 million from $8.6 million. Purchase accounting for Osterman and SemStream remained preliminary and could change materially.
- Subsequent to quarter-end, NGL acquired Pacer on January 3, 2012 for approximately $32.2 million cash and 1.5 million common units, and North American Propane on February 3, 2012 for approximately $66.8 million cash, subject to adjustments. These acquisitions were not included in December-quarter results.
Outlook, risks and contingencies
- Management expected operating cash flows and revolving-credit borrowing capacity to meet liquidity needs for the next 12 months, while noting that further acquisitions or changed assumptions could require additional capital. As of February 10, 2012, available borrowing was reported at $48.6 million on the working-capital facility and $4.9 million on the acquisition facility.
- Management expected to sell down SemStream-related inventory and repay associated working-capital advances before March 31, 2012. Continued warm weather, weak demand or customer/counterparty nonperformance could reduce sales, terminal throughput, earnings and cash flow. If inventory could not be reduced to normal seasonal levels, an inventory write-down might be required; none was indicated at December 31.
- Propane and NGL price volatility, weather, supply and transportation availability, competition, customer credit, interest rates and access to capital are key risks. A hypothetical 10% NGL price change would change the fair value of commodity derivatives by approximately $2.7 million, according to the filing.
- Outstanding fixed-price sales contracts were approximately $187.2 million and purchase contracts approximately $74.8 million at December 31; contracts expire through December 2012. Operating leases and storage arrangements also create commitments. The partnership disclosed ordinary-course litigation but did not expect it to materially affect financial position or results.
- The filing states disclosure controls were effective. Integration and internal-control implementation for Osterman and SemStream remained in progress; the company intended to exclude certain acquired operations from its fiscal-year control-effectiveness assessment because of their size, complexity and limited evaluation time.
Most important facts for investors to verify
- Whether warmer-than-normal weather and inventory levels led to lower demand, weaker margins or an inventory write-down by fiscal year-end.
- Post-acquisition operating performance and final purchase-price allocations for Osterman and SemStream, including goodwill and acquired-asset values.
- Debt availability and compliance with borrowing-base, seasonal paydown and covenant requirements, especially after the Pacer and NAP acquisitions.
- Whether operating cash generation supports distributions and the increased acquisition-related debt burden.
- Integration progress and the scope of acquired businesses excluded from the fiscal-year internal-control assessment.